Leasing vs. Buying

5 advantages of leasing vs. buying forklift equipment.

Aug 03, 2016
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After years of heavy lifting, your forklift equipment is showing its age, and it’s time to replace it with more modern lift trucks. Should your company lease a forklift or buy it, when it comes time to upgrade your equipment? Warehouse managers and the executives that work with them in procurement, typically think of buying new first when replacing lift trucks. However, there are really good business reasons to consider leasing new forklift equipment.

Monthly Expense vs. Depreciation

The decision to purchase new equipment or opting for a lease depends largely on how your CFO or comptroller wants to record the expense on the company’s books. It can be expensed monthly by choosing to lease, or your company can buy the forklift and depreciate it over time.

If your forklifts are starting to show the tell-tale signs of wear and tear, upgrading sooner than later will save you time and money and prevent equipment failure from sidelining your business. If the need is there but you want to avoid an upfront capital expenditure, then there are great alternatives.

Flexible Financing for Forklifts

Financing your forklifts and other material handling equipment lets you upgrade quickly, and gives you the flexibility to pay for your new tools over time, in manageable monthly installments. By leasing, you can customize your payment plan – accelerated payments, skip or defer payments, make seasonal payments, or standard monthly payments – and in most cases, receive 100% financing by accessing this economy’s low interest rates. There are different types of leases available, and we can help you find one that best serves your needs. With fair market value leases, you can choose to either return the leased equipment, or at the end of the lease period, you can opt to purchase the forklift equipment for its fair market value.

Renting vs Leasing Forklifts

Now if you wondering about the difference between renting and leasing a fork truck, let’s look at the major differences. If you need equipment for only a short period of time, such as a special project, seasonal needs, or unexpected surges in shipping requirements, then renting is probably your best option. Renting is more expensive per month than leasing, but will cost you less over the course of a year if you don’t need the equipment full time. If you do, leasing is the economical way to go if you prefer not to buy. Did you know you can lease more than just standard vehicles for your material handling needs? Types of equipment that you can lease include:

Benefits of Leasing Material Handling Equipment

Most warehouse managers look at leasing forklift equipment for one or more of the following reasons:

Avoid Obsolescence:

Maintain a level of superior machinery. By leasing your material handling equipment, you will keep your options open and never get stuck with outdated equipment.

Eradicate Downtime:

When lift trucks age, they tend to fall into disrepair more often, requiring that they be taken out of service. By leasing your equipment, you not only mitigate the risk of forklift failure, but you also avoid the longer downtime that is typical when operating repair prone, older equipment.

You Are Not in the Repair Business:

Leasing forklifts can include full contract maintenance agreement, which can be rolled into your lease cost. This simplifies the accounting and when it comes time for maintenance or repair, you call in the request and let someone else deal with the fix, while you move on to your next task and focus on your business. The lease specialists at Arbor can help you choose the right options for your company. If know what you need, then simply ask for the package you have identified and we can do the work to get the lease for your new material handling equipment done. (And we’d be happy to help you fulfill a request to buy new, as well.)

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Types of leases you can choose:

Operating Lease

You will run across this type of forklift equipment lease most often. In this type of lease, a company is protected from the drawbacks (but also loses the benefits) of forklift ownership. An operating lease is better for equipment that has a shorter life, like forklifts in high volume operations. It’s also suitable for forklifts that the company does not want to keep past the term of the equipment lease, because of high maintenance costs. You may also see this kind of lease referred to as “FMV”, “Tax Lease” or “True Lease”.

FMV: Tax or True Lease

FMV leases are ideal when the company is not sure if it will want to continue to use the equipment past the length of the lease and it wants options, so that at the end of the lease it will have three choices:

1) Purchase the forklift at fair market value

2) Return the lift truck equipment back

3) Negotiate an extension or new lease agreement.

Features and Benefits

  • Level monthly payments
  • Option to purchase for a fair market price
  • Business may claim payments as expense (subject to advice of tax adviser)
  • Payment of unit over time
  • May provide planned replacement
  • Fixed costs aid budgeting
  • Optional ownership
  • May provide tax benefits and minimize or negate the impact of AMT
  • Conserves working capital
  • At term end, forklift may be replaced with new unit
  • Lower monthly payment

Capital Lease

This is a lease where the company gets the benefits (and drawbacks) of ownership. Capital leases are usually used for equipment where the company will likely (or must) buy it at lease end. Common terms for ‘capital leases’ are Full payout lease, $1.00 purchase option lease, and forklift lease to own option.

Full Payout / $1.00 Buyout Option

$1 Buyout Leases are capital leases, and are great when a company wants the tax advantages of Section 179 but is also pretty sure they want to own the equipment when the lease term is over. The business secures a forklift for lease, and at the end of the lease term, the company then buys it for $1. Full Payout and $1 Buyout Option leases are available for both new and used forklift financing.

Features and benefits

  • Level monthly lease prices
  • Depreciation and interest deductions claimed by the company (subject to advice of tax adviser)
  • Payment of forklift over time
  • Fixed costs aid budgeting
  •  Business takes full advantage of tax benefits
  • Conserves working capital
  • Fixed price purchase lease option

Fixed Purchase Option Leases

Fixed purchase option leases are similar to a $1 buyout because the company can buy the equipment for a predetermined cost (examples: 10%, 20%), which is a percentage of the original price, and still provides a lower monthly payment like an FMV. You still retain the option to renew the equipment lease, or return the equipment at end of the lease agreement.

Features and Benefits

  • Level monthly lease rates
  • Option to purchase for a fixed price
  • Company may claim payments as expense (subject to advice of tax adviser)
  • Payment of lift over time
  • Fork truck may be returned at lease end
  • Fixed costs aid budgeting
  • Optional ownership
  • Business takes full advantage of tax benefits
  • Conserves working capital
  • Pay only for forklift use

Other Lease Types

Accelerated Payment Leases

Accelerated Payment Lease – Monthly payments are higher in the first year and decrease annually over the life of the contract to better align payments to maintenance costs. If you perform your own forklift maintenance, this might be an attractive option for you. This can be used for both operating and capital leases.

Skip Payment Lease

Skip Payments – If your business is cyclical or seasonal, this option allows you to synchronize your payments with your cash flow. A skip program is typically limited to 3 skip payments a year. This can be used for both operating and capital leases.

Which lease is right for your company?

Every lease decision is unique, so it’s important to study the lease agreements carefully. Compare the costs of leasing to the current interest rate, examining the terms to see if they’re favorable. What is the lease costing you? What are your savings? Compare those numbers to the cost of purchasing the same piece of equipment.

How many years do you plan to operate the equipment? What is the estimated cost of maintenance during this time? What is the economic life of the equipment? Consider all these factors and you’ll quickly see which the most profitable route is.

Close-End Lease versus Open-End Leases

If you decide to lease, make sure you get a closed-end lease without a balloon payment at the end. With a closed-end lease, nothing is owed when the lease period ends (unless there are repairs to be made or damage to the equipment). When the lease period terminates, you just turn the equipment in and walk away. This is how most forklift leases are structured today, and all Forklift Systems leases are structured.

With an open-end lease, it’s not that simple. If you turn in the equipment at the end of the lease and it’s worth less than the value established in the contract, you’re responsible for paying the difference. If you do consider an open-end lease, make sure you’re not open to additional charges such as wear and tear.

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